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Are Your Wages Set in Beijing?
RICHARD B.FREEMAN
During the 1990s, the wages of unskilled workers in the United
States have fallen in real (inflation-adjusted) terms. In Europe, in
an analogous trend, real wages have remained stable but
unemployment levels for unskilled workers have dramatically
increased. Economist Richard B.Freeman surveys the growing
literature on the effect of trade on wages and employment. Drawing
on the theories used to understand the political economy of trade
in earlier articles (Rogowski, Reading 20; Alt and Gilligan, Reading
21), Freeman argues that there are good economic reasons for
expecting trade to lead to the “immiseration” of low-skilled workers
in developed or capital-abundant states. Factor prices, including
wages, in different national markets that are open to trade should
tend to converge.
Freeman then examines the empirical evidence and finds the
picture more mixed. The consensus opinion is that trade may have
contributed to a fall in real wages for low-skilled workers, but it
cannot itself account for the scope of the existing problem. Estimates
of the future effects of trade are even more uncertain. Freeman
has analyzed an important trend within the international economy.
Whether the effects of trade are real or partly exaggerated, his
analysis helps explain why in many developed countries labor is
moving into the protectionist camp.In the 1980s and 1990s, the demand for less-skilled workers fell in advanced
countries. In the United States, this showed up primarily in falling real wages for
less-educated men, although hours worked by these men also declined. In OECD-
Europe, it took the form of increased unemployment for the less skilled. Over the
same period, manufacturing imports from third world countries to the United States
and OECD-Europe increased greatly. In 1991, the bilateral U.S. merchandise trade
deficit with China was second only to its deficit with Japan.
The rough concordance of falling demand for less-skilled workers with
increased imports of manufacturing goods from third world countries has
created a lively debate about the economic consequences of trade between
advanced and developing countries. This debate differs strikingly from the
debate over the benefits and costs of trade in the last few decades. In the
1960s and 1970s, many in the third world feared that trade would impoverish
them or push them to the periphery of the world economy; virtually no one